PRICE INDICES: CPI v/s WPI

Presented by:
Nitin Sardana (2010205)
Sakshi Agarwal (2010206)
Sankha Dip Datta (2010207)
Shourjo Sengupta (2010219)
Susnata Chakraborty (2010236)
Veethika Pande (2010249)
 “Switch over to CPI regime: BJP”
New Delhi, Dec 15 (India Blooms News Service)

• The Bharatiya Janata Party (BJP) slammed the Congress-led UPA

government for petrol price hike and demanded immediate withdrawal of
it.
• BJP MP said this hike was tailored on the presumption that the inflation is
down but this is not the real reflection as far as the food prices in the
market are concerned.
• “The Govt. changed the whole basis of calculating Wholesale Price Index
(WPI) in Aug 2010. It changed its base year from 93-94 to 2004. It
increased the basket of 435 items to 676 items. Due to these changes the
weightage of food articles has gone down from 15.4% to 14.3%.
• “And more surprisingly, the food grains per se account for only 0.4% in the
new series. People are actually experiencing higher prices in the market
than what is declared in the WPI.”
• BJP demands that Govt. should immediately switch over to CPI regime.
 Introduction
• Sharp movements in prices, upward or downward has always
been a matter of concern world over and regarded as a major
economic problem.
• It is essential for any government to compute the Inflation
rate accurately to frame its policies.
• Lately, in India, with frequent hikes in fuel prices, inflation has
become an important issue and the method of computation
of inflation, a huge topic of debate.
 Price Indices in India
• The two major price indices in the Indian context are
Wholesale Price Index (WPI) and Consumer Price Index (CPI).
• WPI is more widely accepted in India and it takes into account
the wholesale prices, i.e., the prices charged by the
wholesalers.
• CPI takes into account the consumer prices or retail prices. In
India CPI is calculated mainly under four different heads:
– CPI for Industrial Workers (CPI-IW)
– CPI for Urban Non-Manual Employees (CPI-UNME)
– CPI for Rural Labourers (CPI-RL)
– CPI for Agricultural Labourers (CPI-AL)
 Wholesale Price Index
• WPI was first published in 1902, and was one of the most widely accepted
economic indicators available to policy makers until it was replaced by
most developed countries by the Consumer Price Index in the 1970s.
• WPI is the index that is used to measure the change in the average price
level of goods traded in wholesale market.
• The Indian government has taken WPI as an indicator of the rate of
inflation in the economy.
• Till August 2010, in India, a total of 435 commodities data on price level
was tracked through WPI taking 1993-94 as the base year.
• In August 2010, the WPI computation in India was revised and a basket of
676 goods were taken keeping 2004-05 as the base year.
• It is available on a weekly basis with the shortest possible time lag of only
two weeks.
 Consumer Price Index
• CPI is a statistical time-series measure of a weighted average of prices of a
specified set of goods and services purchased by consumers.
• It is a price index that tracks the prices of a specified basket of consumer
goods and services, providing a measure of inflation.
• Under CPI, an index is scaled so that it is equal to 100 at a chosen point in
time, so that all other values of the index are a percentage relative to this
one.
• Since, it is measured at retail prices, it gives a proper picture of inflation
and its resultant effect on the consumers.
• Of the various CPIs estimated in India, the most important one is CPI-IW.
• This estimates the cost of living for the industrial workers in the country.
• The coverage of this measure, though not as that of WPI, it is broader
than the other CPI indices.
 Inflation in India (Monthly- 2010)
Month WPI CPI-IW Inflation % Inflation %
(WPI) (CPI-IW)
January 134.8 172 8.53% 16.22%
February 134.8 170 9.68% 14.86%
March 135.8 170 10.23% 14.86%
April 138.3 170 11.00% 13.33%
May 138.8 172 10.60% 13.91%
June 139.4 174 10.28% 13.73%
July 140.6 178 10.02% 11.25%
August 140.7 178 8.82% 9.88%
September 141.5 179 8.93% 9.82%
October 141.7 181 8.58% 9.70%
Inflation: WPI vs. CPI-IW
Why is WPI considered over CPI-IW
by the Govt. of India?
• WPI is available with the weekly frequency of releases as against
the monthly frequency of CPI-IW.
• WPI is released with a smaller lag of a fortnight. On the other hand,
lag in CPI-IW is one month.
• WPI is computed on an all India basis, whereas CPI-IW is just
constructed for specific centres and then aggregated to obtain the
all India index.
• Though services come under the ambit of WPI, the coverage of
non-agriculture product is better in WPI than CPI. The coverage of
tradable items, mainly manufactured products, is higher in the case
of WPI. Wider coverage of commodities makes WPI less volatile to
relative price changes as compared to the CPI-IW.
 Why CPI over WPI?
• Limitations of WPI are
– non-inclusion of services
– use of gross transactions data rather than data on final
purchases
• The CPI-IW captures the price increase in the service
sector as it takes into account the prices for end
consumer.
• Also, the weightage of food items in CPI is more than
that in WPI that gives more clear picture of burden
on common people.
 Impact of Hike in Fuel Prices
• Not much impact on WPI as it
does not consider service
charges like transport costs,
which is the main area that is
affected by fuel prices.
• On the other hand, there is
greater impact on CPI, as
apart from the changes in fuel
prices, it also takes into
account the rise in food and
other prices due to the
increase in transport costs.
 Conclusion
Having discussed the reasons for considering WPI in the
Indian scenario and the advantages of CPI over WPI, we can
conclude that with a large component of India’s aggregate
income being generated through services, CPI gives a clearer
picture of inflation and its impact on the ‘AAM AADMI’, i.e.,
the end consumers.